THE BREAKFAST BRIEFING

The massive rally in home-builder stocks has cooled off over the past few months, a trend that analysts say could have negative implications for the overall market.

Housing stocks had an ugly week last week after two prominent builders — KB Home and DR Horton — reported disappointing quarterly results. Both companies unveiled lower-than-expected orders and deliveries, a trend that analysts say is sweeping across the housing industry amid a fear that rising mortgage rates could stall the housing recovery.

The action in home-builder stocks exemplifies this concern. KB Home and DR Horton are each down more than 30% from their May highs (albeit after doubling over the past two years). Lennar and PulteGroup have suffered similar falls over the past few months.

These declines have occurred even as investor fear over the anticipated tapering of the Fed’s $85 billion monthly bond-buying program has diminished this month. The S&P 500 is up 5.3% in July, it hovers around record highs and it has recouped its taper-tantrum-induced losses during May and June.

The fact that housing stocks have lagged the broader market is a cautionary tale of what could transpire on a bigger scale, said Barry Knapp, chief equity strategist at Barclays. Once fears of diminished Fed stimulus pickup again, he expects more trouble in the markets.

“The moves in the builders is representative of what we think will happen on a broader basis in small caps, financials, discretionary; that is, a policy-related correction on the belief that the Fed is taking away the punchbowl too soon,” Mr. Knapp said.

Fed Chairman Ben Bernanke has repeatedly said any potential tapering is dependent upon the data. Investors will get plenty of economic data and Fed news to digest this week.

First up is a reading on second-quarter GDP on Wednesday. Economists are expecting another lackluster period of growth, pegging expectations at 0.9%. Then comes the Fed meeting, also on Wednesday, which is likely to garner plenty of talk but little action. Fed officials are expected to debate the best course of action for how and when to start winding down their stimulus programs. But they aren’t expected to take any action this week, with many economists anticipating some sort of move at the September meeting.

The week concludes with the July jobs report. Economists are expecting about 180,000 jobs were added, a figure that would represent a slight improvement from previous months.

While the stock market continues to hover around all-time highs, some investors are looking under the hood and finding reasons for caution. Housing, right now, is one of them.

“Housing…is the key to this recovery,” said Ian Weiner, director of trading at Wedbush Securities, “and it is on incredibly shaky ground right now.

“Housing-related stocks led us out of the recession and now have turned down in the face of an overall market that continues to trade at or near its highs,” he said.

Morning MoneyBeat Daily Factoid: On this day in 1958, President Eisenhower signed a bill into law that created NASA.

-Steven Russolillo

STOCKS TO WATCH

Omnicom is set to be in focus after announcing a ‘merger of equals’ with Publicis, resulting in an union of two companies with a combined stock-market value of $35.1 billion. Shares in Omnicom climbed 2.5% in after-hours trading Friday.

Anadarko is expected to report second-quarter earnings of 90 cents a share, according to analysts surveyed by FactSet.

Wynn Resorts is estimated to report a profit of $1.57 a share for the second quarter, while Caesars Entertainment is expected to report a loss of $1.40 a share for the second quarter.

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